Has Wall Street turned into one big casino?Article added by Joe Simonds on September 27, 2011
Joined: January 24, 2011
Ranked: #12 (3,826 pts)
I can still recall my mom’s words of advice over the phone just days before leaving for Las Vegas: “Only gamble with money you won’t mind losing.” For those of you who don’t know what Vegas is like, you don’t have to travel far. Just track the Dow Jones on a daily basis while we weather this European crisis.
Vegas baby, Vegas.
Every time I hear that phrase my mind goes back to the scene in the movie “Swingers” when Vince Vaughn and Jon Favreau decide to take a last minute road trip from Los Angeles to Las Vegas. I will start off by saying that I really enjoy Vegas. At my old office, my colleagues could always get my attention by yelling out “Vegas!”
In fact, back in my bachelor days, I made five Vegas trips in one year. It wasn’t like Vegas was in my back yard either. It was a good four-hour flight each way.
You're probably thinking I must have had a gambling problem. Let me explain. It all goes back to my first trip that year.
I remember sitting down at a blackjack table with a mere $250 that first day. By good fortune, I turned it into $1,200 a short time later. After walking away a winner, I was actually smart enough not to gamble again that trip. I came home happy and feeling like the “big winner, like the money” (Swingers quote).
A few months later, another friend invited me to go to Vegas again. After my previous experience, I wasn’t going to turn him down. So I went again. Trip number two was another success, and yours truly came home with an extra $1,000 and an all-expense paid trip.
Ten weeks later it was one of my college buddy’s bachelor parties. How could I miss that? Not to mention, I was feeling like the king of the blackjack table. In fact, I had never tasted defeat. And if you can believe it, my third trip was as successful as the first two. Before you start to doubt my story, please read on.
Just four weeks later, I was back in Vegas to take on the casino and walk away with a cool grand again. However, this time my luck went south. After three nights of gambling, I came home tired and down $1,500. I thought for sure that was a one time deal. Even the luckiest guys have bad days.
My October birthday proved to be the perfect time for getaway number five. Although I had a great time, once again I came home with my head low and my pockets empty. In fact, I had not only given the house all of my earnings, but I also lost much of my initial gambling money.
So, what does this have to do with finance, you might ask? Recently, the same Vegas phrase has been conjuring up thoughts of the stock market and it’s similarities to Vegas casinos.
Have I made money in the stock market? Absolutely. Have I lost just as much? Over the past couple of years, yes. Do I still like Vegas? Yes. Do I still have money invested in the stock market? Yes. But just not as much. Do you see any similarities?
Let me clarify things further. The majority of people investing in the stock market three years prior to the financial crash of 2008 were experiencing a high like I did on my first three trips to Vegas. Times were fun. You could invest in almost anything and win.
Often, the winnings were very big. It almost felt like you couldn’t pick a wrong stock or mutual fund. But everything came crashing to a halt at the end of 2008.
Even though there was a more than modest recovery over the following two-and-a-half years, today’s Wall Street feels more and more like a casino. Can you remember a time in the past when the Dow Jones would start down over 300 points and then finish up over 250 based solely on fear and guesswork? Today, these 200- to 300-point daily swings are a common theme on Wall Street.
Whatever happened to the days when the stock market’s performance was based on earnings of the companies it represented? Today, the largest Dow components could post positive earnings, reveal they have more cash and liquidity on their books than ever, and yet the market may still tank due to uncertainty in a small country in Europe.
We have become so globalized that investing long term in strong and stable companies seems to be a thing of the past. It is all about hitting the home runs quickly and getting out before things go south again.
My wager is that due to globalization, super computers that do most of the trading and our society of short term thinkers, Wall Street as we know it will never be the same. Will people still make money betting on Wall Street? Absolutely. Will people keep winning money in Vegas? Absolutely.
But the advisor who keeps telling his client, “Just stick it out, the market always averages 9 percent over time” is doing his client a disservice. The landscape has changed. It would be like telling a client they should expect 6 percent to 7 percent in a fixed indexed annuity right now when annual caps are at 4 percent.
Once again, times have changed, the bond market has changed and the foreseeable future won’t look anything like the past. If I were a retiree with my retirement money in the stock market, I would not fear outliving my money. I would have died from a heart attack already.
I don’t entertain the notion that I have the solution to this problem. If the stock market was this volatile six years ago, people easily could have moved over to bonds, fixed annuities or even a money market fund paying a decent return. But now that we have artificially dropped rates to all-time lows and penalized anyone who is a saver, the options are slim.
I can still recall my mom’s words of advice over the phone just days before leaving for Vegas: “Only gamble with money you won’t mind losing.”
For those of you who don’t know what Vegas is like, you don’t have to travel far. Just track the Dow Jones on a daily basis while we weather this European crisis. For me, I am tired of giving my money to the house.
I would enjoy any feedback or comments on where you are putting your client’s safe money regardless of whether it is with Wall Street, a commodities account or an insurance company. Looking forward to hearing your thoughts.
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